Tag Archives: conventional property tax

Testimony given May 19, 2014 to Strategic Advisory Committee on the West Quadrant Plan

Neighbors in the West End portion of downtown Portland are tired of walking by block-long stretches of surface parking lots while some of our historic buildings are razed for redevelopment. One solution to this problem that the City of Portland should seriously consider is taxing land at a higher rate than buildings.

Taxing land and buildings at the same rate per square foot means that as long as you don’t put any buildings on your land, your tax bill is going to remain relatively low. If you’re a speculator, this means that you only need a modest amount of revenue (say, a few bucks a day from people driving into the city for work or to go shopping) in order to sit on that land indefinitely. Or you might hold out until someone comes along offering your “pie-in-the-sky” price. Either way, the effect is to keep the land out of the hands of many of those with genuine interest in putting it to productive use.

By taxing land at or near its development potential, however, owners of land being used at less than maximum productivity would be paying a disproportionate amount in taxes in order to keep it that way.

Aside from the obvious goal of raising money to pay for public services, we levy taxes

to discourage a particular behavior in favor of another (taxes on cigarettes and alcohol discourage consumption and thus promote lower health care costs), or

because a given resource is scarce while demand for it is high (i.e., the gasoline tax).

But if the city is trying to encourage development—and to attract the 70,000 more downtown residents it seeks by 2030—it hardly makes sense to place the greater tax on development behavior.

A Good Illustration: The block between SW 11th & 12th and SW Taylor and Yamhill that the

Parking Lot at Rear of Medical Dental Building pays 5x less taxes/sf than the building.

Medical Dental Building at 833 SW 11th Avenue (built 1928) sits on provides a good illustration. It is a block with a 10 story commercial building, a 2 story parking garage and a surface parking lot.

When you look closely at the property tax bill for each, it becomes clear that the conventional property tax deters development and risk-taking.

The surface parking lot spans 20,000 sf, and its owner pays $1.33 per-square-foot of land in annual property taxes to the city.

The 1928 parking garage on the same block spans roughly half the area (10,000 sf), and despite the lot’s structural improvements, pays only a bit more than the surface lot in property tax —$1.37 per-square-foot of land.

The Medical Dental Building (which occupies 10,000 sf of the block), however, pays $6.13 per-square-foot of land—a rate almost 5 times higher than the surface parking lot.

12 West pays 42-45x more than the parking lot diagonal from it.

An illustration that takes into account newer construction is the corner of SW 12th & Washington where 1227 SW Washington, aka 12 West (2009), is assessed $59.90 per sf of land compared to the surface parking lot diagonally across from it that is assessed only $1.42 per sf of land occupied[i]. 12 West has a tax liability that is 42x that of the surface lot.

Parking Lot Diagonal to 12West pays 42-45x less than 12West

This is completely backwards. From the city’s perspective, the Medical Dental building and 12 West are the best and most preferable uses of land in their respective locations, while the surface lot is the least. And yet, looking at the tax figures one would think exactly the opposite. By simply taxing land at a higher rate than improvements, owners would be motivated to maximize the productivity of land. Parking lots would still exist of course, but they would be condensed into above- or underground garages rather than surface parking lots. In this way, by removing the penalty for development, two-rate taxation is actually a form of economic stimulus.

But two-rate taxation is about more than encouraging dense urban development and reducing sprawl. As Rick and Walt Rybeck note in Break the Boom and Bust Cyclehttp://bit.ly/R1CPVm, two-rate taxation also addresses the root cause of the boom-and-bust cycle of the real estate market:

Higher land taxes discourage land speculation by making it less profitable. Prior to the Great Depression, there was a nationwide real estate boom and bust. Not surprisingly, land values in major U.S. cities declined drastically. Between 1930 and 1940, land values declined in New York, 21 percent; Milwaukee, 25 percent; Cincinnati, 26 percent; New Orleans, 27 percent; Cleveland, 46 percent; Los Angeles, 50 percent, and Detroit, 58 percent.But Pittsburgh adopted a two-rate property tax in 1914. As evidence that this reform reduces speculation, Pittsburgh’s decline in total land values was only 11 percent between 1930 and 1940.

After increasing the tax differential between land and building taxes in the late 1970s (land was taxed at a rate 5.77 times higher than buildings), Pittsburgh also saw significantly increased development activity at a time when most cities its size were experiencing declines.

There are obstacles to implementation. Current law requires state enabling legislation for the two-tier land tax that I am suggesting, but there are indications that Gov. Kitzhaber would favor that.

Appendix – from Portland Maps

833 SW 11th Ave. – Medical Building

$61,291.51 taxes on 78,148 square feet on 10,000 sf of land or $6.13 sf of land

Market Value

$4,976,640.00

Assessed Value

$2,542,330.00

837 SW 11th Ave. – structured parking lot

$13,751.20 taxes on 20,000 sf on 10,000 sf of land or $1.38 sf of land

[i] I was not able to easily find the taxes paid on the 3 parcels that make up this corner where a City Center Parking lot operates because Portland Maps just said “No address is avaialble.” So I used the tax figure for the grassy lot next to it at SW 11th & Washington which is $1.42 per sf. This figure is higher than that for the City Center Parking lot at SW 12th & Yamhill which is $1.33 per sf. If $1.33 per sf is used, then 12West is assessed 45 times more per sf than the parking lot.

I have been a friend of Rick Rybeck (cited above) and admired his work for a long time. But, I want to acknowledge that I borrowed the approach of looking at individual parcels and some of the language above from the Streets MN blog Tax Land, Not Buildingsby Chris Keimig. Thanks, Chris!